It is all over the news paper and tv news channel for the last 24 hours. The law makers in the US has turned down the $700 billion bail out package. There apparently has been the perception that the bail out is for Wall Street. And, Main Street is not going to bail out the overpaid wrong doers. Hmmm ....

It is an unfortunate decision and can have devastating effect on the market. Simply put ... banks take your deposit at a percentage interest and they turn around and lend you deposit to people who borrows at a higher interest rate than what they are paying you, the depositors. Now what happens when your bank lends your money to borrowers who are defaulting and not paying back the debt they owe you? This is a very simple example of what is going on. Essentially, the US government has set very low interest rates for the last ten years and consumers have been borrowing at record pace. More specifically, they have been borrowing to buy real estates. In the US, the interest you pay on your mortgagee is tax deductible making it even more attractive to leverage yourself. It is all good as long as interest rate does not rise.

Than, there is the war. War is a costly exercise especially when the victor do not get the spoils of war as from annexing all the country's asset for themselves. In the old days when Rome attacks and takes over a country they own everything they took over. That helps the war cost as you get something for it. Attacking Iran and than go into a rebuilding mode with no end in sight is a costly affair. The US dollar comes under pressure as we saw the Canadian dollar soar against the US just like other currencies. The US government shore up the US dollar value by increasing interest rate so that their government bonds are attractive to buyers. A demand for US government bonds denominated in US dollars helps maintain a demand for US dollar and helps prop up the US dollar value. Off course, this can not go on forever. But, the real deal here is rising interest rates.

Now, put the top two paragraph together. Lots of home owners leveraged to real estates and sensitive to interest rate increase. US government raises interest rate to crate demand for US dollar. This is the toxic mixture.

The failure of so many financial institutions stems not just from Wall Street greed (there's lots of that) but from past government policies in interest rates and costly foreign policies. In the debate between the two Presidential candidates last week the moderator asked the question on what the new President would do in light of the economic crises, one talked about changing defense contract from cost plus to fixed cost and the other when on about what programs are important moving forward. Not one said anything about getting out of Iraq as a solution. Huh?

The current financial crises is NOW a government problem not a Wall Street problem. The major contributor has been the government. Wall Street just made financial weapons of mass destruction out of materials given to them by the government, which is low interest rate for the last ten years and than rising interest rates to support aggressive foreign policies that is blowing up financial instruments created in the last ten years.

It appears just being a law maker does not mean you know much about economics. The right wing Republicans held true to their belief of letting market forces determine the fate of private enterprises ... a noble position that reflects a poor understanding of the financial infrastructure and the current problem. The problem is systemic as the failure is wide spread. Wachovia is not Lehman or Bear Sterns. Wachovia is a bank and typically heavily regulated and risk adverse. Freddie Mac and Fannie Mae are mortgage lenders promoted by the US government to loosen their lending criteria. Many of these institutions are not driven by bright greedy people on Wall Street. But, they are in deep trouble and now are owned by the US government.

So what is next? It looks like Bush is going to try again and maybe this time some sense would prevail. There is no other choice. In the meantime, I am trolling the market for deals. Two micro cap that I like are Certicom and Points. I did buy some PTS yesterday at $0.59 and I though it was a joke bid until it got filled. Haha. My hold period is one to two years ... not a day trade strategy. Points have not been the same since the botched bought deal that saw millions of shares sitting in the participating brokers' inventory. While these guys are not making money yet they have built the largest loyalty exchange program in the world and it would be hard to compete against for new entrants. I do worry about the new programs where PTS is taking some liability in making a market for trading points.

I have always liked Certicom and have made money on a number of occasion trading in and out. Business will continue and the biggest challenge for Certicom's management is smoothing out the quarterly revenue and be profitable. Their technology will continue to be adopted by all US government suppliers as the NSA has made Certicom ECC one of the cornerstones of US security. There is also the law suit against Sony for patent infringement, which I am betting that Certicom would come out on the winning side. Listen, if the NSA has licensed ECC and you have not and is using it, you are guilty. In wireless security, there is no other solution that works with AES except ECC. Expect growth from wireless, licensing to government suppliers and a growing new patent licensing business. My top pick for myself at these price levels $.125 to $1.50. I do worry about the short term instruments Certicom is holding as they have a lot of cash.

Note: If you need the money you are investing in the next year or two you should not be investing in the stock market. If you cannot afford to loose, than you should not play. Pay off your mortgage first as that is also equity. Investing in the index is always safer than investing in companies. Buyers beware is alway true.

The bad news continue to roll out with Lehman filing for bankruptcy and Merrill being bought out by Bank of America. Freddie Mac and Fannie Mae in trouble and government intervention required? Should we fear for the worse? What is worse? Oil prices at $200 a barrel? There seem to be no safe haven in the stock market these days. Financials are in distress. Commodities are plunging. Tech ... well we know what happened and it never really recovered. Is this the end of the world?

Hahaha ... you got to be kidding. Oil was never meant to stay at $140 let alone where it is at today. I think the spike in the oil prices is akin to a great analogy I heard over dinner about frogs and hot water. A frog will die in a pot of hot water if you turn the heat up really slowly. But if you turn the heat up high fast, the frog will jump out of the pot and run away. That is a good analogy to potential oil consumer behaviour in the future. Thank you Andy for such an elegant example. Oil shooting up 300% over a short period of time will change consumer behaviour ... they are going to jump out of that hot pot. GM knows this as all the hybird cars have been sold out and GM has no such product but gladly tell you, the potential hybrid car owner, that they are working on it and you should see it at your local GM dealer in 2010 (as advertised ad nauseously during the Olympics 2008). Cars is one of the largest consumer of oil and that is going to change. Some oil gurus see oil around $45 to $65 on along term basis. I would subscribe to that view.

Financials? A once though to be the ultimate safe haven is now in distress. The sub-prime is taking its toll. So, who do you think these guys are at Lehman? God? yeah, they are normal people smarter than the average person but still prone to mistakes as its our human condition. I have never been a big fan of financial engineered products like Income Trust. I remembered a CEO whispering to me at his AGM about what I thought about becoming an Income Trust as my competitors at that AGM were seeking an audience with him to pitch converting to an Income Trust. I asked the CEO if he is growing? He said "Yes." I asked if he needed capital to grow? he said "Yes." Than, why an Income Trust pitch? Exactly ... there is a herd mentality in investment banking and true thinkers are rare. We now know what happened to Income Trust right? The government gives the government takes. The first mortgage backed asset (MBAs) was a great idea. But, after the eleven thousandth MBAs, the quality goes down. But, bankers know how to do it now and it makes them money so keep going until .... Stay tune as I expect more news to come and the situation to get worse. AIG was once the best investment in the portfolio management industry and just about every fund holds the stock. I remember my old boss faithfully attend all their meetings when they are in town. How times have changed ....

The other market sector has been overshadowed by these broader problems. I think what we are seeing here are extraordinary events some say happens once every 100 years. I have a friend who believes he is cursed because everything he does goes against him. He called me up one day and told me he bought some shares in Carnival Cruise Line and said watch something bad is now going to happen. Within a week one of the Carnival ships caught on fire. He published a report on a company and the company had a flood that happens once every 100 years that badly impaired operations. So, 100 year events may happen more frequently?

I don't know about you. But when the blood is gushing out on the streets, I get very very excited. It is a time to buy! The question is what to buy? Next installment ....